Occidental Petroleum Corporation — Q1 2020 Form 10-Q Summary
Business context and reporting period
Occidental Petroleum Corporation reported unaudited results for the three months ended March 31, 2020. Operations comprise oil and gas, chemical, and midstream and marketing segments. The period reflects the August 2019 Anadarko acquisition, the COVID-19 pandemic, a sharp decline in oil and gas prices, and the resulting reduction in global demand and storage availability.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $6.410 billion | $4.004 billion |
| Income (loss) from continuing operations | $(2.013) billion | $631 million |
| Net loss attributable to common stockholders | $(2.232) billion | $631 million |
| Diluted EPS | $(2.49) | $0.84 |
| Operating cash flow | $1.339 billion | $948 million |
| Capital expenditures | $1.293 billion | $1.259 billion |
| Cash, cash equivalents and restricted cash | $2.364 billion | $1.752 billion |
- Net sales increased 60% year over year, primarily from higher production following the Anadarko acquisition, despite lower commodity prices.
- The company recorded $1.803 billion of asset impairments and other charges, including a $1.2 billion write-off of WES-related goodwill.
- Other significant items included a $952 million gain on oil collars and calls, a $669 million loss on interest-rate swaps, an $84 million warrant gain, and $148 million of Anadarko acquisition-related costs.
- Worldwide average realized oil prices declined to $47.08 per barrel from $52.62; NGL prices declined to $12.82 per barrel from $18.14, and worldwide natural gas prices declined to $1.32 per Mcf from $1.55.
- Continuing-operations production increased to 1,417 MBOED from 713 MBOED, primarily from acquired DJ Basin, Delaware Basin, and Gulf of Mexico production.
- Oil and gas segment earnings were $179 million versus $484 million; chemical earnings were $186 million versus $265 million; midstream and marketing reported a $1.287 billion loss versus $279 million of earnings.
- Total debt and finance leases were $38.522 billion at March 31, 2020, including $2.464 billion of current maturities. Long-term debt, net, was $36.058 billion.
- Stockholders’ equity declined to $31.295 billion from $34.232 billion at December 31, 2019, primarily reflecting the quarterly net loss and dividends.
- Operating cash flow from continuing operations was $1.224 billion. Investing cash flow from continuing operations used $1.509 billion, and financing activities used $1.019 billion.
Material changes versus the prior comparable period
- Results shifted from $631 million of continuing-operations income to a $2.013 billion loss.
- Revenue increased because of the Anadarko acquisition, but lower oil, NGL, natural gas, and chemical prices reduced underlying profitability.
- Depreciation, depletion and amortization increased to $2.242 billion from $973 million, primarily due to acquired assets.
- Interest and debt expense increased to $352 million from $98 million because of acquisition-related debt issuance and assumed debt.
- The company adopted new credit-loss and goodwill-impairment accounting standards; the credit-loss adoption had no material quarterly impact.
- South Africa assets were sold to Total in January 2020. In April 2020, Occidental concluded that the planned sale of its Algeria assets to Total would likely not close; Algeria was expected to return to continuing operations beginning in Q2 2020, with a possible remeasurement charge.
Guidance, outlook, commentary, risks and unusual items
- Occidental reduced its 2020 capital budget to $2.4–$2.6 billion from $5.2–$5.4 billion and expects more than $1.0 billion of cash operating and corporate cost savings.
- Management announced an intended reduction in the common dividend to $0.11 per share from $0.79, effective July 2020, subject to Board approval. The Series A preferred dividend was elected to be paid in common shares for the second quarter, preserving approximately $200 million of liquidity.
- Management estimated that CARES Act tax and deferred pension measures could increase 2020 liquidity by approximately $275 million, including an anticipated tax refund of approximately $195 million.
- As of the filing date, the company reported $5 billion of available revolving-credit capacity. Debt maturities were approximately $6.4 billion in 2021 and $4.7 billion in 2022; approximately $2.4 billion was due in the first quarter of 2021.
- Management believed cash and revolver capacity were sufficient for the next twelve months, but cautioned that prolonged weak oil demand could require additional liquidity, debt extensions, or both.
- WTI closed at $20.48 per barrel on March 31, 2020. Management expected storage capacity to become fully utilized as early as the end of May and indicated that additional production curtailments could occur.
- Most, if not all, oil and gas properties could be tested for impairment in Q2 2020. Additional non-cash impairments could be material. The March 31 net book value of proved and unproved oil and gas properties was $67 billion.
- WES’s investment carrying amount was $4.8 billion at March 31. A sustained decline in WES’s unit price could require an additional other-than-temporary impairment.
- Debt ratings were downgraded to BB+ by S&P and Fitch and Ba1 by Moody’s, potentially increasing borrowing costs and collateral requirements.
- Environmental remediation liabilities totaled $1.177 billion across 177 sites, with reasonably possible additional losses estimated at up to $1.1 billion.
- The filing identifies continuing exposure to COVID-19, commodity prices, OPEC+ actions, storage constraints, production curtailments, debt refinancing, asset sales, impairments, reserve revisions, environmental matters, litigation, tax audits, and counterparty and derivative collateral risk.
Important facts for investors to verify
- Whether Q2 and later oil-price conditions triggered material additional impairments of oil and gas properties, Algeria assets, or the WES investment.
- Actual cash generation, production levels, and liquidity after the announced capital, operating-cost, and dividend reductions.
- Progress and proceeds from planned asset divestitures and the company’s ability to refinance or repay 2021 and 2022 maturities.
- Whether storage constraints resulted in further production shut-ins, higher transportation or storage costs, or adverse well-performance effects.
- Final treatment and valuation of the Algeria assets and the status of the potential Ghana sale.
- Payment form and status of preferred-stock dividends, common-stock dividends, and related dilution from preferred shares and warrants.
- Developments in environmental liabilities, the Ecuador arbitration, Sanchez-related bankruptcy claims, tax disputes, and the $18.25 million Colorado regulatory penalty.